Thursday, December 12, 2013

14 Ideas to Make Newspace Accelerators Better

Business accelerators in Silicon Valley (CA),
Boulder(CO),
and across the US have been gathering the best young entrepreneurs, providing
them the time, resources, and business connections necessary to start
successful software companies. These accelerators have helped such
success stories as AirBNB: now worth $2.5B and DropBox: now worth $8B.

Can the lessons from software-focused business accelerators
be modified to benefit commercial aerospace firms (referred to here as
“Newspace”) that need to develop physical hardware (not just software) with
correspondingly longer product development cycles? Are hardware-based
accelerators possible? If possible, what would these accelerators look
like? Below is an overview what
accelerators are and my fourteen recommendations for enhancing the capabilities
of Newspace accelerators.

For many, YCombinator wrote the definition of what an
accelerator is. Located in the Silicon
Valley, YCombinator helps software startups succeed. Twice per year they bring in a bunch of
startups (from thousands of applicants) and invest in each firm ($20K for
3-7%). In the early days, only a few
firms were funded, recent batches have included over sixty startups in a single
batch. Over the course of three months
(the length of the “batch”), YCombinator helps startups mature. Some firms need help with an idea for a
product, others with introductions (access to the YCombinator Rolodex), still
others need help navigating the pitfalls of a growing software startup.

Each batch culminates in Demo Day where each startup pitches
to venture capitalists (and occasionally, Ashton Kutcher). Both Air BNB and DropBox (mentioned above)
were accelerated via YCombinator. Many
of the companies in each YCombinator batch…FAIL. But the YCombinator assumes this failure will
happen. The compensation from wildly
successful firms more than compensates YCombinator for the cost of the failed
companies. Since YCombinator does not
know who will be successful at the outset, if the entrepreneur team is accepted
into the YCombinator program…they get funded.

YCombinator combines:

an “accelerator” (the advice and maturing
services) with

a “startfund” (the capital that gets invested in
each firm).

For simplicity, I will use “Accelerator” generically
throughout this post to mean the combination of both advice and capital.

Is a startup - a startup regardless of industry? Sadly, no.
Although the YCombinator/Techstars accelerator model can serve as a template,
important work still needs to be done to modify the software accelerator model
to better fit hardware startups, particularly Newspace hardware startups. The table below highlights a few of those
differences:

Organizations have already begun the good work of porting
the software accelerator model over to Newspace hardware startups. Two examples include: Silicon Valley SpaceCenter and Space Tango.

Silicon Valley Space Center is a Newspace accelerator in the
heart of software country (Sean Casey, Managing Director). They provide frequent events (Hackathons) and
networking opportunities. But although
SVSC makes introductions to angel capital, they lack a startfund of their own. Space Tango is a more serious attempt to mirror
YCombinator. Space Tango has three month
“batches” where participants relocate to Kentucky for a 12-week training
program. Space Tango has a startfund
($20K for 5% equity), with follow-on rounds possible. Space Tango offers mentoring and accelerator
services, but is a young organization, having only raised a $100K startfund to
date. The announcement of Space Tango’s
initial batch should be made in the next few weeks.

Below are a few recommendations for ways to build on these
efforts. My recommendations are
influenced by:

Interview with Jon Goff, Founder &CEO of Altius Space Machines on what he would
have wanted in an accelerator for his own startup.

Interview with Jeff Lints, Director of
Operations, of the Energy Fellows Institute– working
to provide accelerator services to Clean Tech (a sister industry similar to
Newspace in many ways)

Discussions with a series of space
advocates/friends who helped mature these concepts

1. Low Capital to Start. Reducing the Capital requirements necessary
to successfully fund a Newspace startup is a goal that both focuses the mind of
Newspace entrepreneurs and focuses the efforts of support organizations like business
accelerators. For most entrepreneurs,
proposing the business plan that requires hundreds of millions of dollars to
execute and needs only one starry-eyed billionaire to agree is NOT a good
recipe for repeatable success. Even when
the entrepreneur proposes a manageable business concept, accelerators add value
by reducing costs for infrastructure services (e.g. office space, etc.) or
access to capabilities that startup would normally not be able to afford (e.g.
vacuum chamber for testing prototypes).
YCombinator has brokered a deal with Comcast to provide each startup
extremely fast internet connection for their three-month stay in Silicon
Valley. What are the services from which
a Newspace startup would most benefit?

2. Speed to Market. Minimal Viable Product (MVP) is a term common
in software startups thanks to the work of Steve Blank and Eric Ries. Like the name suggests, MVP’s push a
startup to get a product into the hands of customers as soon as possible. The MVP joke is if you’re not embarrassed by
your MVP, your MVP is too mature. MVP’s
give entrepreneur early revenue and, more importantly, they give startups
feedback from customers. Although you
don’t hear pharmaceutical entrepreneurs or nuclear power plant startups talking
about MVP’s very often, the advent of Cubesats, NanoRacks-based ISS
applications, and greater use of Commercial Off-The-Shelf (COTS) technology on
space projects enable the MVP concept to be added to the Newspace startup
lexicon. Two-year projects are preferred
to five-year projects. Are their ways
the startup can commercialize a subcomponent of their “Two-Year Project” and
get to market in one year? As a general
rule, faster to market is preferable.
Note that faster to market will reduce capital requirements also
(linking #1 and #2).

3. Capital and Liquidity Opportunities. How do we get Angel investors in an industry? Altius’ Jon Goff said something profound in a
Thruster issue about a year ago that has stuck with me. In other industries like tech, a good-sized
portion of the industry’s Angels are created from successfully exiting
entrepreneurs that now have experience and capital and still want to be
involved in the industry. However these
successful entrepreneurs are not ready for the hard work of starting a second
startup. The profound part of Mr. Goff’s
article is acknowledging how few exits Newspace has to its credit – thus the
number of industry Angels may also be reduced compared to other
industries. While industry loyalists
wait for the Angels to arrive, an accelerator could be very helpful here,
introducing Angels from other industries to Newspace. This work would supplement the good work the
Newspace Global and many others are already
working in this arena. As discussed
above, YCombinator not only offers capital from their startfund, but also
brokers countless introductions between startup and capital sources. With each introduction, YCombinator’s capital
rolodex grows. With each successful
startup to graduate the program, YCombinator’s alumni network grows as
well. Both are important.

4. Industry Awareness. Newspace, focused on commercial aerospace
projects, would greatly benefit from a higher industry profile. Many still are unaware of the unshackling
from Government contracts that is underway within the aerospace industry. Accelerators can help significantly
here. By aggregating Newspace startups
into a single effort, accelerators may be more influential to news
organizations and those peaking over the fence into Newspace from the
outside. In the same way #1 and #2 are
linked. Note how #3 (capital and
liquidity) are linked to #4 (industry awareness).

Here are Fourteen Ideas for enhancing a Newspace
hardware accelerator:

Makerspace (free tools, supplies, and office
space) run by the Accelerator.Because
the cost and time to develop a prototype, aerospace firms have a tendency to
develop elaborate PowerPoint files, predisposed to take contract money before
engaging in any significant prototyping.And when the industry does build, they over engineer since “this has to
work” and often the project lacks prior iterations to leverage.Chris Anderson, in his book, Makers: The New Industrial Revolutionillustrates how accessible manufacturing technologies are to the average
person. Jon Goff reinforced this point
when describing the makerspace Altius uses in Denver and the 3-D Printer they
use in the office. Make these tools
available to startups within your Accelerator.
I envision a facility that combines co-working space with a common
makerspace area to access shared tools for R&D manufacturing. What would you do if a laser cutter were as
accessible as PowerPoint? The ethos of
the startup changes from talking to doing, from PowerPoint to building
hardware.

Small product/service.Accelerator advisors should HIGHLY encourage
their teams to think smaller.Less to
develop – reduced capital requirements - faster to market – probably faster to
exit.I like the story Jon Goff tells.
He wanted to develop an orbital propellant depot (gas station in space) so he
focused on tugs which could be a major component of depots (depending on the
architecture) and could be developed much less expensively than a depot.But tugs were still too big, too expensive
for a startup develop, so Jon evaluated what elements of a tug he could make
better.Believing rendezvous and docking
technology was ripe for disruption, Altius invented Sticky Boom.

Accelerator startups should be asking the
same “downsizing” questions.

Greybeard Mentor/Labor Team.Unlike software startups where a coder could
be one of the world’s best before age 25, it takes time to develop as an
aerospace engineer.And the aerospace
engineers with real-world experience are highly prized.Under most scenarios, this type of experience
is not available to Newspace startups.Accelerators could offer each batch access to a team of semi-retired
“Greybeards” – engineers with hardware roving on Mars or orbiting Jupiter.Greybeards could review/critique plans by
joining a firm’s advisory board or even play a more active role on startups
that interest them.

Partnership with local universities provide low
cost graduate work force.Another
cost-saving method would be to offer the batch access to competent part-time
workforce to help move the MVP to Demo Day.I am not necessarily saying these same students would build the flight
hardware that flies on the International Space Station (although some could).I am saying that free competent labor can
help enhance a startup’s product offering by Demo Day.Good for the student.Good for the entrepreneur.

Shared Admin Services.Using my Makerspace/co-working space as a
model, batch-mates could share the cost of an administrative assistant.Jon Goff laments the number of hours he
spent, in the early days of Altius Space Machines, doing “non-CEO
activities.”They had to be done and
there was no one else to do them.An
admin assistant could help alleviate this problem and make
Accelerator-empowered CEOs all the more productive.

ITAR Lawyer services FREE.Worth mentioning here, unlike most software
startups, Newspace startups need to be aware of International Traffic in Arms
Regulations (ITAR) and develop strategies to not run afoul with the State
Department.Many of these startups would
benefit from lawyer services to help navigate the ITAR swamp.An Accelerator can help facilitate this.

Market Analysis and Biz Model Development
Support (Newspace Analytics, Newspace Global, etc.).Another service that would help young
startups would be assistance in developing a business model with profit
potential.Firms like Newspace Analytics
and Newspace Global or accelerator in-house services would be very valuable to
the entrepreneur.

Lessons from Clean Tech.In preparing this post, I interviewed Interview
Jeff Lints, Director of Operations, of the Energy Fellows Institute.The Energy
Fellows Institute looks to bring accomplished C-Suite executives or second-time
entrepreneurs from other industries into Clean Tech.Recognizing the challenge in attracting the
best and brightest innovators to clean tech, the Energy Fellows are influencing
the quality of the entrepreneurs in their industry through a similar
accelerator-type program.Newspace
shares many of the same challenges to Clean Tech.Newspace entrepreneurs may value greater
participation from accomplished C-Suite executives and successful second-time
entrepreneurs.Imagine preparing for
Newspace Demo Day where the entrepreneur is not only trying to woo potential
investors but is also interested in attracting a COO/CFO/CEO from a stable of
qualified candidates.These C-Suite
candidates have been watching each firm in the batch throughout the term.Convincing one of them would, not only help
your startup make better decisions, but also help close on the next round of
funding.

$200K up-front investment.In the early days of YCombinator, they traded
~$20K for 3-7% equity.Recently, they
have increased their funding levels via a convertible note.Space Tango is also talking $20K of capital
offered to each startup (although Space Tango has hinted at the possibility of
follow-on financing for those Newspace startups with promise).So what is the appropriate capitalization
level to enable startups to develop/test real products?Jon Goff helped considerably here.Mr. Goff recommended $200K for each
startup.This would cover early hardware
R&D work and labor costs (the two largest expenses for early hardware
startups) at least through Demo Day.The
$20K offered by several current accelerators is too small, if the intend of the
capital was to truly produce a near-term MVP.

Six-month Batches.Both YCombinator and Space Tango offer an
intense 3-month on campus experience for their batches.A six-month cycle acknowledges that hardware
takes longer to create then software code.The six month batch also gives time to schedule testing via zero-g,
suborbital flights, and local universities and large aerospace firms.Such testing would be much more difficult to
include if the program only lasted 3 months.

Demo Day.Without the lure and threat of a room of VC’s/Angels waiting for each
startup’s presentation at the end of the batch, startups within the accelerator
lose a strong forcing function.A
Newspace accelerator should put special emphasis here – the accelerator’s value
to each startup will be heavily impacted by the quality of VC’s and Angels the
accelerator can attract to Demo Day.For
most startups within the program – every decision should be made with Demo Day
in mind.

Newspace Accelerator for a better Newspace
industry.Although not required to be an
accelerator, using the accelerator to promote the industry as a whole is strong
way to grow the pie.

TV Documentary/Reality Show for each batch.Again, not required.But with the success of ABC’s Shark Tank there appears to be an appetite for shows about entrepreneurs striving to make
to succeed in business against all odds.This may be one area where Newspace actually has an advantage over
Silicon Valley and YCombinator.Watching
a startup team operate an welder, see a 3-D printer manufacturing parts and
watch real hardware get tested on a suborbital rocket flight is much more
satisfying television than overseeing a twenty year-old writing code in his
apartment while eating Raman noodles and drinking Red Bull.

These ideas are expensive.
If an Accelerator offered $200K to five ventures per batch, that is $1M
per year in equity capital investment.
Plus another $1M in operational costs to maintain the
makerspace/co-working space, staff salaries, testing assistance for startups,
etc. $2M in annual obligations may be
challenging to achieve. However, an
underfunded Accelerator loses much of its value and thus loses much of its appeal.

*********

Dream with me. After months of interviews and intense
deliberations, SpaceCombinator
selected its latest batch of Newspace startups.
Co-locating to Boulder, CO was an issue for some, but in the end the value
of the six-month program, the access to all of the major aerospace firms along
the corridor to Denver (and the occasional trip to the mountains) made the
co-locating rule manageable. $200K for
15% equity stake gave each selected firm an immediate $1.3M valuation. SpaceCombinator chose the majority of firms
for their ideas, but a few firms were selected because the selection committee
was impressed with the founders (even while the product idea needed to be
rethought). Over the six-month batch,
the firms worked with staff to develop products customers will buy. A few firms switched products after R&D
efforts indicated a needed pivot.

SpaceCombinator provided a steady stream of guest speakers from both
small and large aerospace firms at the weekly dinners. NASA spoke one night. DFJ’s Jurvetson spoke one night. The in-house makerspace enabled a quick
validation of design assumptions, and made conversations with customers more
productive with tangible prototypes to discuss.
The teams were constantly iterating (iteration has always been the best
type of failure). Hardware tests were
conducted via partnerships with the big aerospace firms. One firm even flew suborbitally (twice). Another batch-mate is on the manifest for an
upcoming NanoRacks flight to the ISS.
SpaceCombinator’s alumni list is growing. With a handful of successful exits and
several dozen going concerns, alumni firms share a special bond with the
current batch and look for ways to help these startups in the same way they
were helped by even earlier batches.
Greybeards, SpaceCombinator’s group of seasoned veterans, taught several
founders to weld, helped two startups understand the complexity of ISS-based
deployments and introduced at least one firm to those within NASA’s
ISS-utilization office. The separate
group of C-Suite executive veterans made the rounds to each of the
startups. They gave advice, asked
questions, listened to Pre-Demo Day pitches.
One exec did not wait for Demo Day, she accepted an offer to join one of
the firms as CEO. The firm’s founder was
only too willing to move to the CTO role to make room for the more accomplished
CEO. An unforeseen benefit has been the
amount of cross-fertilization of ideas and methods that has come from
co-locating the startups at the makerspace.
Teams come out of their offices to see what their batch-mates are working
on. All are motivated to build more and
do more when others are watching.

And it all culminated
in Demo Day. NASA, Angels, VC’s,
Lockheed Martin, Boeing, Northrop Grumman, Ball, NanoRacks, and others were all
there. Each firm in the batch took turns
sharing slides and demoing hardware. One
firm had only that – a vision and limited HW model to show for their six month
effort. But several had strong stories
of flight-demonstrated hardware, paying customers, and a plan for growth and
profits. One firm could already announce
true revenue with presales from an upcoming commercial rocket flight. SpaceCombinator took the concepts pioneered
by software accelerator and made them work for hardware startups going to
space.

2 comments:

Great post, Colin. I particularly liked the ideas about partnerships with local universities, discounted ZeroG/NanoRacks/sRLV flights, and the TV show.

You might be able to do a non-reimbursable SAA deal with the Flight Opportunities office at NASA to get them to chip in a certain number of ZeroG/sRLV flights to the accelerator per year. Buying full ZeroG or sRLV flights might be really expensive for the accelerator otherwise. CASIS might be able to do a similar deal with funding the NanoRacks opptys? Especially if CASIS can resolve the IP issues like they've been talking about.

I think getting a larger number of 2nd-time entrepreneurs in NewSpace is going to be key, and an accelerator that gets a lot of companies focused on nearer-term "base hits" would be awesome.

One other idea--even if the incubator is say located in Boulder, you could partner with University Tech Transfer offices throughout the country to provide tech transfer opptys for startups in the accelerator. I'm sure Georgia Tech, Stanford, MIT, and other heavy hitters would love to have a partnership like that arranged.

ITAR is far from the only regulation you can run afoul of in the US. For example, there are ATF, EPA, and OSHA regulations on transporting and storing small amounts of explosives and certain types of rocket and satellite propellant, FAA regulations on drone aircraft and rocket launches, and FCC regulations on allowed frequencies for radio use.

Also, I think contracting with US government agencies (such as NASA and the DOD) has its own special perils. They can demand things that considerably increase the cost of a contract which could be fatal for a start up that isn't prepared.

Finally, one can run into interference from big players. For example, SpaceX has had some of its early Falcon I launches delayed by scheduling games played by other aerospace businesses sharing the same government launch pad locations.

Some space activities may require insurance of various sorts. The incubator program may even be able to match start ups with affordable and willing insurers.

I think merely being aware of when these issues can be problems for the start up and general strategies for dealing with them would help ease the way through many potential mine fields.

I would go as far as to say the relatively tough regulatory and government-contract dominated environment of anything deployed in space, which is much different from software development, should be another row in your table of differences.